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EDITORIAL: Emulating Estonia

Lowering taxes and reducing regulation work

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Estonian President Toomas Hendrik Ilves receives his ballot during parliamentary elections at a polling station in Abja, Estonia, on Sunday, March 6, 2011. Estonia voted in its first election since becoming a eurozone member, with the center-right government hoping to be rewarded with an unprecedented second term for steering one of Europe’s most depressed economies back to growth. (AP Photo/Timur Nisametdinov, NIPA)

Europe is in big trouble. Unemployment remains sky-high, and economic growth averaged a mere 1.2 percent in 2011, with some economies continuing to shrink. Estonia is a remarkable exception to the depressing trend.

One of the Baltic tigers, Estonia adopted free-market policies following the dissolution of the Soviet Union. It instituted a flat tax, free trade and liberalized markets. The Heritage Foundation ranks it 14th in the Index of Economic Freedom. The results speak for themselves. Thanks to a genuine austerity program that imposed real spending restraint, the tiny Eastern European nation’s economy grew 7.6 percent in the first quarter of this year.

Paul Krugman, a New York Times columnist who thinks the government can never spend enough, was offended by the possibility that someone could find inspiration in Estonia. In a blog post Wednesday, he dismissed the Estonian recovery as “incomplete.” Estonian President Toomas Hendrik Ilves responded with bitter sarcasm on Twitter. “But yes, what do we know?” Mr. Ilves wrote. “We’re just dumb & silly East Europeans. Unenlightened.”

According to data from the International Monetary Fund, Estonia doubled its output in just 15 years and had one of the highest growth rates in Europe from 1996 through 2008, when the credit and housing bubbles burst. Mr. Krugman is correct that Estonia suffered a severe economic slump in 2008, as did the rest of the European Union (EU). The economy shrank 18 percent between 2008 and 2009, which coincided with a staggering jump in government spending of 18 percent, as the Cato Institute’s Daniel Mitchell points out.

In the first attempt to deal with the crisis, the Estonian government tried a Keynesian prescription and increased spending. The Estonians, however, quickly realized the futility of stimulus spending and reversed course. Starting in 2009, the country cut civil-servant salaries, raised retirement ages and liberalized labor markets even further. Estonia is running a budget surplus.

Estonia’s 11.5-percent unemployment rate is slightly higher than the EU’s 11 percent average, but it’s far lower than Spain’s 25 percent or Greece’s 22 percent - and robust growth is sure to improve the jobless situation. The national debt in Estonia is just 6 percent of gross domestic product, compared to 100 percent in the United States or 165 percent in crisis-wracked Greece.

True austerity, which reduces the burden of government, is needed to reignite growth all over. Most of Europe practices a faux austerity that merely raises taxes without cutting bureaucracy. America is on a similar path, experiencing the third year of sluggish, barely existent growth.

The East Europeans have shown the world that free-market policies work. Washington needs to follow their lead and embrace smaller government.

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